European fund returns are trailing those of their US counterparts, following the US transition to a T+1 settlement cycle. Analyses of passive S&P 500 funds reveal that European returns are lagging by 14 to 20 basis points compared to US-domiciled funds, reports the Financial Times (FT).
Since the US shortened its settlement cycle from T+2 to T+1 on 28 May, European funds investing in US equities have shown reduced performance. Total returns for EU-domiciled S&P 500 tracker funds and ETFs have averaged 4.14 per cent, compared to 4.28 per cent for their US equivalents. This disparity widened to 20 basis points using weekly return data up to 3 August.
Experts suggest this performance gap reflects the broader issue of settlement misalignment between Europe and the US. Asset management executives have warned that the increased costs associated with trading in Europe are negatively impacting fund returns.
More expensive
A person working for a large asset manager, speaking on condition of anonymity to FT, said “it is more expensive to operate and trade in Europe” since the US moved to T+1. This is particularly burdensome for firms with limited global reach that cannot easily adjust their processes.
Jim McCaughan, US practice leader at asset management consultancy Indefi, highlights that due to settlement misalignment “there will be a measurable drag on performance” which could force funds to borrow funds or use brokers for later settlements, adding extra costs.
2027
EU policymakers are deliberating whether to align with the US and move to T+1 by 2027. The European Securities and Markets Authority (ESMA) is expected to issue recommendations soon. Vincent Ingham, director of regulatory policy at the European Fund and Asset Management Association told an ESMA hearing last month that the current discrepancy is increasing costs for European fund managers, ultimately affecting investor returns.
